The Influence Of Corporate Governance On Internal Control Deficiencies

Domestic and foreign serious financial fraud cases occur frequently since21century.Especially, the financial crisis which was triggered by the “Lehman Brothers bankruptcy” in2008let the global capital markets awake to the importance of internal control. All kinds offinancial fraud cases, both the international large enterprises Enron’s financial fraud scandaland CAO’s(China Aviation Oil) significant financial losses are related to the low efficiency ofcorporate governance and the weakness of internal control system. In2002, AmericanCongress passed the “Sarbanes-Oxley Act”(SOX Section). Meanwhile, Chinese governmentissued “The Basic Standard for Enterprise Internal Control” and “Internal Control Guidelines"in2008and2010. These laws and regulations make issues of internal control deficiencybecome the focus of research. And the definition and classification of internal control in“SOX Section” and “Internal Control Guidelines” provide a strong legal basis for the furtherrelated research.At the present stage, the existing problems of China’s corporate governance and internalcontrol are as follows:“Insider control” phenomenon is an urgent problem for solving. Due tothe self-interested behavior of executive, many financial fraud cases happen and theshareholders’ and other stakeholders’ interests are damaged. Inefficient governance structureleads to the weakening of internal control. Previous studies also show that, the weaker thecorporate governance is, the worse the internal control system is. According to the currentsituation and the previous research, it’s significant to have a deep analysis to find how thecorporate governance influences the internal control deficiency. This will give us a more clearunderstanding of the relationship between corporate governance and internal control and alsohelp us to find more efficient ways to improve the quality of internal control system.In this paper, we choose the data of the main board in Shenzhen Stock Exchange’s Ashares market as the research object, using both the theoretical study and empirical research.Based on the previous paper review, theoretical review and logic analysis, we focus on thefactors of corporate governance which will have impact on the internal control deficiency. Theresults show that: The corporate governance will influence the deficiency of internal control,to a certain extent. The more independent the board is, the less the internal control deficiencyexists. The state-owned enterprises are less likely to have internal control deficiency. Thecorporation with characteristic of president and manager as one person are more likely to haveinternal control deficiency and more shareholder meetings indicate that the corporation mayhave more problems in internal control system. These conclusions provide us a betterreference to understand the relationship of corporate governance structure and internal control.It also gives us a direction to make corporation’s governance structure more reasonable,improve corporate governance efficiency and strengthen the construction of internal controlsystem.